>> we look at what worked in 2015. the saudi's are squeezed. it the first budget is out in an hour or so. becomes the question of the year. good morning. withichael mckee along vonnie quinn and erik schatzker pinafore tom keene.

this is all about economics and politics and hockey. wilsey. to >>r days is enough it's been an interesting year for the markets. >> people have four days to get their accounts in order. >> let's take our look news from vonnie quinn. iraqi soldiers have recaptured the government complex that had been held by islamic state since may. they were help u.s. and coalition aircraft. david cameron will visit communities in the northern part of the country that were hid by flooding. people been evacuated.

the military has been called in to help. rain, cameron called the flooding unprecedented. leastul windows killed at 11 people in texas over the weekend. over 1500 homes were damaged. hardest hit was the dallas suburb of garland. the top legislature has approved the first anti-terrorism law. it gives sweeping definitions to the crime and was chinese army to take part in counterterrorism overseas. the bank of japan says the tokyo limits will boost the japanese economy by $259 billion.

there will be an increase in a foreign tourists. planning has been hurt by cost overruns. powered by viewers around the world. michael: a few of them are not a work in london today. it's a holiday there and the markets are closed. let's see what's happening around the rest of the world. stuck to that in your 5%. it's heading for the worst december since 2002. they are down again today. year.p is up for the can we finish ahead? it looks like will start down on the day. bonds are slow to adjust to the fed it to. what is parking? we can't talk about 2015 without talking about crude oil. look what that has done to the

ruble. a new low for the year. copper is back. is chuck host lieberman. commodities have been the story of the year. you look at copper and you look at what's happened. as commoditiesar drag everything down. growth thand slower expected. which really driving this is china. it's the largest consumer of copper, the largest consumer of steel, iron ore, nickel, industrial metals. over 50% of the conception of cement is china. of this is the infrastructure they are building. far lessely done, demand for commodities in general and weak prices.

is that reflective in current prices? chuck: there is still some room to go. the haven't seen the bottom yet. vonnie: is there a way to profit from that? we have avoided all the commodity producers. rages -- ranges from the minors to the companies that produced equipment. we simply avoid that whole area. michael: how much more of the drag is it on emerging architect and stocks and investments in developed markets that don't rely as much on commodities? chuck: you are actually a beneficiary. and thatess for steel

makes autos cheaper. that's better for consumers. would have seen the same thing with oil. michael: why do we see that reflected in equity prices. arewe start going if we overall in better shape? we have entered the world of psychology. we look at the energy space in particular. upstream companies in producing those companies are directly damaged by the decline in prices. we see that reflected in the stock prices. when you look at some of the downstream companies, they are shipping more product through their pipelines and selling more retail. they are making more money because they earn a spread on what they are selling. they are making a bit more. their stock prices are down. i think the market hasn't figured this out yet. erik: i'm looking at a chart

here. this shows that even the best-performing asset classes of the past year have poorly eked out again. 500, the the s&p , barclays bond index high-grade credit. the green line is high-yield. i don't need to tell anybody the yellow line is commodities. when is the last time the best-performing asset classes in the year? chuck: it's a good question. 2011 was a very interesting year where the s&p was flat. so the less volatile sectors did

well. the more cyclical sectors were negative. average that hid some of the stuff that was going on beneath the surface. there is an element of that. if you look at corporate profits, they are not doing very much this year. if you break it apart and you look at the energy sector, they are down 90%. the nonenergy sector is up 7% to 10%. there is a lot hidden. what point does it turn? how much further does oil fall? when do traders stop looking at oil as a proxy? chuck: i think oil is near its bottom. we have seen a fallback and production in the u.s.. 95 millionis down

barrels a day. we have seen a reaction already. i don't think will go that much more. i would not be surprised of oil is bouncing toward the dollar's by the second half. vonnie: what becomes the metric? chuck: the variable they should care about more than anything is the labor market in the united states. we've seen the fed hike rates once. they willld everyone only move gradually. but are not they can deliver on that promise depends and how inflation forms. the labor market is getting tighter. -- unless the repeal the laws of supply and demand, that flows through to prices. wishfulthere is some thinking going on with fed policy. michael: we have not talked

about the greek yield. it has gone away. they were the story for how many years? it has sort of ball off the radar screen. we're going to talk more about that and whether or not he will have any more greases in the future. will talk about the black swans around the world. this is "bloomberg surveillance." ♪

erik: good morning.

this is "bloomberg surveillance." you are looking at london. celebrating the boxing day holiday. vonnie: thank you so much. iran is putting pressure on the price of oil today. they are repeating the goal of boosting exports after sanctions are lifted. they will have the lowest average annual price of 11 years. saudi arabia may tighten its belt because of something oil prices. they will unveil their first annual budget. it may have expenditures. a deficit of post 20% of gdp this year. another milestone for the new star wars. it has grossed more than $1 days andorldwide in 12

that's the fastest any movie his reached that mark. in 2000ought star wars 1200 that is our business/. we were just talking about it. you can't talk about it in public because nobody wants to be the spoiler. thing you say is have you seen it? then you have to talk about something else if they haven't. you guys have seen it? we can talk about it off here. we won't spoil it for viewers. vonnie: i thought it was amazing. it took been that long. michael: vonnie quinn it would do that, see a movie about finance. vonnie: they have waited six years for the bank of england to raise interest rates. good morning to anyone from

listing in. there is no move in all of 2016. it looks like they may have to wait longer. and it seemsyears like the federal reserve is doing its work for it. they are buying more time before a rate hike. we be waiting until 2017? you don't know what's going to happen that could change the picture. right now with oil prices owing down it, it doesn't look like a lot of pressures in england. the governor of the bank of england was speaking with us, trying to give us a sense of what or what not to expect when it comes to raising in 2016. have thei rather british people thinking that

likely to go up the next year? behaviorld that his giving the progress the economy is making. says it's more prudent to expect or to plan for a rate rise and a continuation of interest rates at rock-bottom levels, what message is he trying to send? chuck: he knows. you have to look at the economy. that will determine when they are ready to pull the trigger. if they start seeing sure on , energy isinflation distorting the picture. it's distorting the jerk in the u.s.. market is getting healthier in the u.k.. sooner or later, they will have to move. extent,to a certain

it's doing the banks work for it. by keeping the currency weaker, that strengthens the economy. it reinforces the strength of the labor market area thermal fronts. michael: is this the way we want to look at the bank of england? they are a single mandate bank. we were talking about the fed in terms of having scope to react to future downturns. how much of a role to market distortions play in what the tank of england is going to do? chuck: the u.k. is more open than the u.s.. the u.s. labor market should dominate because imports and exports make a difference, but only at the margins. theve got more economy in -- economy and u.k. they have to be over there of the currency. erik: i want to play more about

that conversation. it gets to the core of the problem, this lack of inflation and how unpredictable it is for the bank of england. >> one of the things we said adjusted ourhave horizon over which we would return inflation to target. there is some persistence. we might not be up to get inflation back to target as quickly as we thought. if that were the only factor hitting. erik: why is at the case? he is saying that if we were able to trade oil as a one time event only, we would still find ourselves with this persistent lack of inflation. chuck: i found that remark surprising. u.k., youe of the have an economy that is more open and more sensitive to the currency.

its domestic activity will respond faster than the u.s. to a change in the currency print the 10th move in our economy will not affect us the way it will the pound. i'm surprised by that remark. michael: we have seen the dollar go down after the fed's rate increase. we will see what happens to the british pound as we go through the next couple of weeks. we will find out what happens in the next couple of weeks to u.s. this is rates during "bloomberg surveillance." ♪

vonnie: welcome back. those are morning shots of new york city. quinn with erik schatzker and michael mckee. i have been item by frank lutz. he writes in the financial times about donald trump. i am not all that keen on talking about donald trump. we have talked about him for the last several months. this is notable because of the writer, imposter. e says

half will follow them out of the republican party are in --. the other point that he makes in this op-ed is pump is unlike the ,ther unconventional candidates john mccain for example or sara:. chuck: i don't think he's a candidate. i think he will drop out as soon as he starts spending money. he has not spent a dime so far. he has enjoyed this incredible ride. he is a pr maven. i think we actually has to start spending money -- i think it's all for show. vonnie: he is connecting with a

good portion of the country. i would like to point out an article that appeared on thursday about people say whatever to pollsters. it may even be true. that's a next point. luntz takes that on in this piece. he says he has spent time with 29 hard court from supporters to try to get to the bottom of what it is they believe and why they are so passionate about his candidacy. he thinks it will. he will say whatever they want to pollsters. street: when does wall care? when does it start to reflect in the markets? chuck: it becomes a concern if he really does have a viable candidacy.

he will get dragged in as a candidate himself. suspects hismself own candidacy. if he thinks he's got enough support, maybe he will get sucked in by the laquon party. they are going to face problems around the world. michael: we will talk about some of those issues. ♪

michael: this is "bloomberg surveillance." joining me is vonnie quinn and erik schatzker.

let's get news from vonnie quinn. vonnie: government forces are claiming a victory over the islamic state. iraqi troops have recaptured a in ramadi.complex the government officials say 1% was killed and 13 hurt in a suicide bomb attack. it happened near the kabul airport. the taliban claims responsibility. they say the target was a convoy of foreign forces. japan's foreign minister delivered an apology in seoul south korea. there is a fund to compensate victims. relations with

south korea and japan. tony was killed 11 people in texas. flooding in the midwest is blamed for at least 13 deaths. the missouri governor has declared a state of emergency. jim webb may be moving closer to an end run the white house. he attacked hillary clinton for her handling of libya. he dropped out of the race in october. i am vonnie quinn. today, press conference saudi arabia will announce its first annual budget since the king and took power. oil prices are the lowest in over a decade. some include cuts in a cap spending. with us now is anders court.

welcome. anders: thank you for having me. erik: i suppose not entirely like china, the government has to walk a fine line between esa and prosperity. what can saudi arabia afford to peace? still maintain anders: i think to bring down some of its expenses, they may cut some services. they may cut some capital expenditures. i don't think you are going to see massive social expenditure decreases. they need to maintain stability. is crucial, especially in the age of isis. al qaeda has targeted the kingdom as a place they would like to infiltrate in the future. michael: how much money do saudi arabia have? pup and is much oil as they can

and try to retain market share, the reserves have come down a lot. what they are selling right now cannot cover their expenses. their budget was at a record last year. they've got to bring down their budget to satisfy international investors. we should see some decreases. it's going to be slow. they may increase their borrowing. about: what do we know the king and his advisers? are they cautious? will they keep their head in the sand for now and wait until things become more dire? anders: i think they are cautious. they are advised very well. they will take slow in moderate changes not to shake the boat up too much. other gulf nations don't

have to worry as much about maintaining stability as much as saudi arabia does. they are affected similarly. how is that going to affect international financial markets? you see these countries that were flush with petrodollars are investing less. chuck: their wealth funds will have to cut back dramatically. all the middle eastern countries are caught between a rock and a hard place. they are low-cost producers. they can pump more if they wish. they can squeeze out others. volumennot make up with they are losing on the price. the price decline has been so substantial. the only when they can deal with it is as we suggested, cut back

on various expenditures. social spending would be an area. that is more problematic politically. they can reduce the subsidies on gasoline consumption. that will help. they can implement all of the stuff systematically overtime. they can avoid a shock to the system. michael: what is saudi arabia going to do in terms of its power relationships in the middle east? the saudi's were not happy about the iran deal. what are the saudis go from here? see oil prices drop, you will see the influence of countries like saudi arabia on decreasing. the influence they often by with money will be decreasing.

you will see some improvement in for the united states and china. michael: we see problems in some of these gulf states. the saudi's are dealing with yemen and iran. is this an area of the world that we need to worry about? anders: absolutely. it's chaos now. inre is a proxy war going on at leastsyria between the ideologies in that area. iran is supporting the military in iraq and syria. saudi arabia possibly, but they deny it, they are supporting the sunnis. erik: 20 people need to worry about? in the past, investors would look to a moral intention in the

middle east and look for it to look at oil prices. anders: part of that is the shale revolution. they cannot threaten us as much. they are trying to maintain market share. market share decreased because of supply. shale producers would step in. vonnie: if the budget shows something unusual today. thee are no cutbacks, with oil market respond to that? anders: i think it will respond. you have seen 2% off some of the stock index in saudi arabia. it might respond more if there were something surprising. i don't expect that. i don't think saudi arabia will bend over backwards not to be surprising today. michael: we will bring you that news as soon as the saudi's release it. we will continue our conversations.

up, the outlook for fixed income markets area it's 6:00 in new york. you're watching "bloomberg surveillance." ♪

erik: we are live here in new york city. that is hong kong. i am erik schatzker with vonnie quinn and michael mckee. we begin in china. there are concerns that the end of the six-month ban on selling

by large shareholders in place during the summer will unleash a wave of selling in china. that's not an unreasonable fear. you can see the shanghai,. -- comp. this is the law of unintended consequences. market,to stabilize the but when the restrictions and it, the chickens come home to roost. michael: you wonder what the political implications are going forward area --. anders: you can tell them not to sell their assets. as soon as they can sell, they are gone. the political implications are the news coming out of china. it's constantly surprising to me. you see the ceos of major especially ones connected to the inner circle,

picking arrested. -- being arrested. you wonder what's going on in the meetings. what happened? it's a confusing. it's a bit unnerving. vonnie: in the context of what we've seen this year, it's not that dramatic area the financials are doing worse in china. are you investing in china at all? chuck: we have minimized our exposure to china. only the big companies that we feel comfortable with. we try to stay away it were not comfortable. renewedt's see how a decline in the price is affecting dutch shale. the oil majors are supposed to

be well insulated from price declines. there is nothing they can do. they can run for cover. chuck: you have a company like shell. they get hurt on the upstream part of the business. it's the same with exxon and the other integrated companies. on the midstream and downstream sectors. that is when the companies will benefit. they should experience rising cash flows. erik: the refiners certainly have. chuck: exactly. the pipelines will be carrying there is more consumption of gasoline and everything else. those companies represent good opportunities. right now, the market does not appreciate oil. michael: is it too early?

chuck: i think there is a strong reaction to the price of oil. a lot of investors invest through etf's. when they put money out, it affects the entire waterfront. we talk about the integrated newmont -- oil majors. what is the long-term impact of companies -- countries like russia? conoco phillips pulled out of places like russia. anders: part of it is sanctions and the massive affect. the have lost up to $1 billion in these areas. that was unforeseen by them. when you have a volatile actor

like vladimir putin making economy, that harm his most of his economy has been harmed by oil prices. 10% of the decline there is due to sanctions. erik: let's move on to our final mover. this is fedex. you heard about those packages that were not delivered on time for christmas. that fedex ande ups ended the year in the same place. have the same problems. you can see how investors reacted. fedex had an argument there was a lot of bad weather. vonnie: a spokesman said that

on-time delivery was 98%. they are winning the pr battle. the real comparison should be with them. erik: are they a good proxy for the economy? chuck: they have been a terrific taxi for the economy. it's in or miss. amazon prime is the one we're worried about. that takes some of the bloom off the rose for these companies. it's made a selected. we'll the back in both ups and fedex. vonnie: they have nothing else to fall back on. amazon has so much. chuck: they are the 800 pound girl in a space. michael: they have started a service for they will deliver for you. reflect thes it change in society to technology

and buying on the internet and how we think about retail? chuck: it's been a huge shift. i think it will continue. it's going to become even more impactful. growth ratehen the of amazon was very high, they watched -- were much smaller. that is no longer the case. we don't have exposure to some of those companies. the look at them because the stock got home. they have gotten cheap. that makes us want to take a look and maybe able make sense to step in there. i am nervous. michael: we will continue our conversation. waitlse was dumb enough to to the last minute and rely on them to get something just before christmas. would've ordered his packages

earlier. he will join us on radio coming up. ♪

michael: the last trading week of the year, i am michael mckee along with vonnie quinn and erik schatzker. let's get to the business flash. vonnie: thank you so much. thearo models are added to recall over airbags. company spokesman said it could affect. nine deaths were blamed on the airbags. mark zuckerberg is making an appeal for india to allow a free internet service. it would like customers to access facebook and other services.

critics say that could change pricing in india. one of basketball's greatest ambassadors has died. meadowlark lemon amazed fans with his trick shots and no look passes for nearly 25 years. he was 83 years old. clown princeim the of the globetrotters. michael: they built their routine on comedy. they were a tremendous basketball team. there was a time when the nba was not all that popular. they really spread the word on basketball played. they have played 16,000 games. as long as i have known

you, you've been in at the mystic guy. -- optimistic guy. we are talking about all the problems. we are talking about the price of oil and commodities. nothing really worked in 2015. you're optimistic about 2016? what gives you hope that next year will be different? chuck: i don't expect 2016 to be dramatically different. innomic growth will come 2.5%. more the same. ongoing erosion in the unemployment rate. more pressure on labor costs. more sure on the fed to hike rates faster. i don't see any great opportunity for capital markets. i don't to the stock market doing well. no chance of repeat of 2013. i don't see it going down or

going up much. it will be steady as she goes. erik: apple has been the bellwether for the market. they have been succeeded by a large group of companies facebook,ge, microsoft. does the market go where those companies go? apple has a problem in that it's such a large company. it's tough to sell more stuff when you're that they get. i think it's a great value. it's a great value stock. there is a lot of cash flow. google has more growth than amazon. google is the company i neglected to mention. chuck: it will grow faster than apple. vonnie: you say high-yield is not as dangerous. chuck: the surprise to me is how

well high-yield dealt with problems. some funds closed because of selloffs. i've been nervous about this for a while. specifically if people pull out of some of these high-yield funds. the funds themselves are not that liquid. they could cause real dislocations within the market. i'm surprised the markets of held up as well as they did. we have been buying and we look for opportunities. one of the areas we like forcibly bonds issued by some of the pipeline companies. there are some that are high-yield. those companies should do fairly well. michael: the question, what does the fed do? is at the question of 2016? chuck: i think that's more the question. the fed is on a course that they

say they will raise rates gradually. the risk is they could move faster. that will affect wages and inflation. camp with the potential unlikely for more. michael: thank you for joining us today. anders will stay with us. we will figure out what he thinks the fed and other central banks are going to do. it's 6:00 in york. ♪

michael: the last trading week of the year opens. we look at what work in 2015 and

what did not. what did not was crude oil, another big drop in trade this morning. the saudi king's first big-budget is out in an hour or so. the question of the year for 2015 becomes the question of the year for 2016. what happens next to interest rates? this is "bloomberg surveillance ," live from our world headquarters in new york. are on francine lacqua vacation this week. we are joined by vonnie quinn and erik schatzker, who is sitting in with us this week. good morning. looking forward to your advice for not just the financial markets, but who is going to win the stanley cup this year? erik: i thought it was going to be montreal, but they have had a rough ride lately. more.ill break my heart vonnie: tom keene --

michael: tom keene is the number one fan. let's get to bloomberg first word news. i do not know if you have a hockey update, but vonnie quinn has the news. .onnie: we have in iraq update -- we have an iraq update. ramadi has been "fully liberated " from islamic state. reporting to the ap. that would be a major victory for the government over the militants. the capital was overrun by islamic state last may. since then, they repelled several attempts to retake ramadi by iraq he forces. blamed onhs are being freakish weather events during christmas weekend. almost 1500 homes were damaged or destroyed. garland,st hit was texas, as a tornado swept through, killing 11 people.

a twister with wind of 200 miles hit that town. flooding in that town is blamed for 13 deaths as well. chicago, another police shooting is raising questions about their use of lethal force. officer shot and killed those go a domesticng disturbance. federal authorities launched a civil rights investigation of chicago police last month after video showed an officer shooting a black teenager 16 times. afghan government officials say one person was killed and 13 others hurt in a suicide car bomb attack near the kabul airport. japan's prime minister, shinzo apologyes a landmark for -- to korean women for treatment during world war ii.

at the world's busiest airport on one of the busiest weekends, they took out time for a party yesterday. honoring their 100 millionth of the year. he did miss his connecting flight. michael: i guess they can drive to their next destination. let's check markets around the world. they are taking a boxing day holiday in london, stocks lower. is going to bet a race to the finish. futures suggest a down opening today. higher.year is moving when you moved by a basis point, it is 1.5%. dollar, the dog that did not isk after the fed -- it

trading unchanged. oil is the story of the day. we see both brent and west texas lower significantly, and that is having an impact on the ruble. it is at a low for the year. copper calling in from the emergency room as well, down. our next guest, our guest host for this hour is the head of u.s. rate strategy for his company, george conn countless -- george gunn calvinists -- george goncalves. the ramadiet back to story that vonnie quinn was just talking about because you are telling us you are not sure that we should trust the reports from the iraqi military. the baghdad government has a big interest in claiming total success in ramadi. yesterday officials were saying that 70% to 80% of the city was still under isis control, and the government simply had only

gotten the administrative center , after three weeks of fighting. so i would not place any big hopes on that pr claim. michael: if it were liberated, what would that mean? george: i would say would mean the public support of the government, the governments primarily sunni and shia, the government has bent over backwards to put a sunni/shia look on the forces by keeping the shiite militias who have done most of the fighting in iraq, which the shiite militias are iran-backed. it is still a mess in iraq, and this is primarily a pr move. michael: we will keep everybody updated on that story. it is an interesting point to bring in george gunn calvinists oncalves. gun

we see bonds usually affected by that but not so much right now. >> it has changed over the course of the year. this past year we have seen the fed rate takes center stage. barring a major catastrophe, people are not flocking the way they used to. michael: where is the money going? george: it is the end of the year. people are trying to reevaluate their investment for next year. i really do not know the whole story behind what is happening here on the geopolitical side. in general we are leading more towards operating fundamentals, and the fed is in play. year yield iso just above 1%. do you anticipate more flattening? george: what we are getting is a

mechanical tightening of the front end. finally the fed is pushing operates mechanically. the long-term rates are not moving as much. even at these low levels of rates, you would think long rates -- long-term rates would move up. that brings into question, is the market skeptical of the fed's intentions? are they marking it up too soon? the idea that bond vigilantes would punish the markets when people got too frivolous, now maybe the fed is going to early or they are not hiking quickly? factors in the rates out on the curve? george: the fed is the virgin from all the other central banks still doing easing, out of europe and japan, which is keeping their long-term rates suppressed. we are seeing people rushed into u.s. fixed income because of the

higher yields. michael: -- erik: yet expectations of rate hikes in the united states at the least are beginning to slacken somewhat. here just aman was few minutes ago saying that he expects the fed to go faster than probably many out there might anticipate. but if we look at a great bloomberg fontan called world interest rate probability, it market really is not anticipating that at all. there is a 51% probability that by march the fed finals will be half a percentage point or greater, and a 50% probability that by november there will be -- they will be three quarters of a percentage point or greater. that defies the dot-plot that we got from the fed days ago. george: it took 15 months to get the first hike. we debated how many brain cells were lost getting one hike out of the way.

now the market is realizing that in three months time, could the fed hike? sure, but there is a 50-50 split. we are in the camp that they will hike by june, so that there will be tailwinds. erik: to what? george: just another 25 basis points. 1%, annish the year at important level for the fed. low.ercent is a former i think that comparing other central banks at zero going negative, that will widen that spread between other countries. 1% is a good number to target, to be the first stage in the hiking process, but it feels like a protracted, slow hiking process. in many ways they want that initially. if the inflation numbers get

better and the economy turned hard by march, it can go. but the market is definitely on point with 50/50. questions have some about oil and the fixed income markets as well. coming up in the next hour, we want to remind you that by bloomberg radio, we will be joined by neil donough. be joinedt -- we will by neil dutta. in new york, it is 11:30. d.c., 99.1 fm. you can see washington waking up listening to us on "bloomberg surveillance." ♪

erik: this is "bloomberg

surveillance," here on bloomberg television. new york city just waking up. witherik schatzker, michael mckee and vonnie quinn. let's bring you the bloomberg business flash. es a globalna finds shippers, saying they are guilty of price fixing. it is an expansion of their anti-monopoly crackdown. widely seen as a government step to force down prices, although tech and dairy companies have already been hit. valeant's ceo is being treated for severe pneumonia. and iran is doing on the price of oil today. iran repeated its goal of boosting its exports after sanctions on the country are lifted. they are set to end 2015 with the lowest average annual price

in 11 years per that is the latest bloomberg business flash. brent crude there at 37.18 this morning. nymex, 37.18. erik: it is a tie. let's keep the conversation about oil going. vince piazza is with us. , statedeating its goal multiple times now, maximizing exports, with the lifting of sanctions. how does that affect the market in 2015? vince co there is no change in the fundamental story. this is their goal post, the removal of sanctions. consider that pre-sanctions they were producing one million barrels more than they are producing today, so it is understandable where that capacity could go, but it will take some time. we would think somewhere in the neighborhood of 500,000 barrels increase through 2016.

yet it is still lower than where they were prior. michael: is that offset by cuts to u.s. fracking production? vince: the resiliency of the -- we havedustry seen this throughout 2015. there will likely be some reduction in 2016, given the cuts in 2015, and in 2016 to come. is it barrel per barrel? likely not. we will still likely see the u.s. production relative to the in 2015ant capex cuts and 2016. we will likely see a very resilient u.s.. this chart shows that the s&p 500 energy index has dramatically outperformed the price of oil. of course, there is so much more that goes into this than just

oil prices. but if oil were to stay where it is today, well underneath $40 a barrel, how much more resilient can those stocks be? thege: i am talking about -- i would think if you take a look at what has occurred throughout the equity markets for the in p/e -- throughout the enp." s, it has been a tough environment. even the integrated games have had a tough year. 2016 -- i do not see how that gets any better, considering you have hedges rolling off and a high haven yield market that can work against the -- a high-you'll market that could work against the credit in 2016. michael: right now at the end of the year is the convergence between brent and west texas. you can see on our chart how they have been moving extra --

how they have been moving ever closer together. brent was trading below west texas earlier today. is this because we are going to exit port oil now? george: you have -- vince: you have removed the governing item, but you have the factor of elevated inventories across the petroleum value chain, whether we're talking refined distillates or products in general. there is a lot of wood to chop to get through in 2016. given that, we have inventories roughly 30% above the five-year average. crude inventories, there is a lot to go through to tighten those balances. you need the demand to come through. you have not seen it so far with respect to the seasonal heating demand, and you are entering a spring maintenance season for the refiners with heavy inventories, and that typically, when refining season -- when that season comes into play, you see you less refining the man. back to the geopolitical

conversation for a moment. when i ran comes back with oil, 500,000 barrels, will it be a smooth process, or will there be the potential for misbehavior? once they start sending -- once they start selling than oil, they will have more influence that they can yield. the question is, how will they use that cash influx geopolitically? enhance thee it to development of their economy or increased military sophistication and reach? some russia officials are out with some comments blaming saudi arabia for destabilizing the world oil markets. going that relationship to work, and is that something we need to worry about in 2016? anders: russia and iran are allied right now, in iraq in syria on the fight against isis.

saudi arabia is on the other side of that, so you can expect russia to support iran geopolitically. anders corr, thank you for being with us. vince p oz from -- vince piazza from "bloomberg intelligence." "bloomberg surveillance" continues in just a moment. from bloomberg radio, come all sri-kumar will join us. boston, 1200 a.m. we want to mention, now in washington, d.c. ♪

vonnie: good morning and welcome back to "bloomberg surveillance ." you are looking at live shots of washington, d.c. the president is in hawaii. there is the beautiful p and i am vonnie quinn, along with michael mckee and erik schatzker. peyton manning is a very angry man. al jazeera television accusing him over the weekend of using performance-enhancing drugs. he is angrily denying it. here is what he told espn in an interview on sunday. relying on jazeera

the word of someone they call charlie sligh. it turns out he did not even work for the company he was supposedly associated with until after peyton manning had been in treatment there for his neck injuries. mr. manning -- now the questions are, is he going to sue al jazeera for this? a number of other athletes were named in the al jazeera story, and they all angrily deny it as well. i do not know if it benefits us to mention who they are. they have not said as much as mr. manning has. he said basically my neck was basically broken, and in 2011 he had multiple surgeries. -- heture he i'll vitriolically denies the allegations. vonnie: it is such a strange story because, what would be the

motivation to defame manning? yet he says that is what has happened. there is a whole potential can of worms that gets opened when you sue, because at that point it becomes a real thing. or do you ignore this? erik: it is so tempting to believe that there could be another balko, the bay area collaborative that was at the center of the scandal involving barry bonds and other athletes because there is such temptation among athletes to juice their performance. tendel: unfortunately, we to not believe athletes these days per you go back to the most valuable player from the milwaukee brewers who angrily denied using drugs but then ultimately he did it. peyton manning has a higher hurdle, but this is an important thing for him because he is looked at as mr. clean and makes

a lot of money off endorsements. our executive producer grew up in indiana and she has written in saying that she is willing to come on and testify in favor of peyton manning. vonnie: she has very intimate knowledge of peyton manning. michael: coming up tomorrow, we fundsalk with oppenheimer ' chief economist. this is "bloomberg surveillance ," on bloomberg television." ♪

erik: good morning once again. it is "bloomberg surveillance," live from new york city. welcome to our viewers in hong kong and around the world. i am erik schatzker.

you the first wear. vonnie quinn, what is the story? vonnie: the death toll is at least 43 in the severe weather that slams the south and mid west. in texas, tornadoes touched down near dallas, killing at least 11 people. flooding in the midwest is blamed for at least 13 deaths. there is a state of emergency in missouri. iraq's government is planning a major breakthrough against islamic state. a spokesperson has announced that ramadi has been fully liberated from the militants. the western provincial council was overrun by islamic state last may. since then, the militants repelled several attempts by iraqi forces to retake it. dozens of opposition fighters are being evacuated on the border town. buses and ambulances will take them to amazon -- will take them to --

legislature has passed the country's first antiterrorism law. it requires tech companies to help investigators break code. one of basketball's greatest ambassadors has died. meadowlark lemon of the holland globetrotters -- of the harlem globetrotters. he was 83 years old. global news 24 hours a day, powered by 2400 journalists. 16,000 games, michael, for meadowlark lemon. michael: and he won most of those. 2016, let's get some stock picks for you of things that might work in the year ahead. david joins us on the phone, vice president with loomis sales. cvs as an interesting

space. drugstores, especially cvs, have been consolidating prescription business and expanding into groceries. cvs, you say, is one of the main beneficiaries. david: i do, and i have owned very few consumer staples stocks over the last five years. but cvs has been one of the steady performers throughout. returns to investors over the last one in five years, that is about double the s&p 500 and more than 10 percentage points annualized then consumer staples in general. the acquisition is they have done make them as much of a drugstore reese taylor -- of a pharmacy retailer as a manager. that puts them in a winning position to continue into 2016 after having slid a bit in 2015 where the stock fell from

anywhere from $115 a share to just below $100 a share today. michael: are they the best position to the pharmacy benefit management space? david: because of the acquisitions they have done, it them ahead of the pack. it is a narrow pack -- walgreen, right aid. cbs -- cvs has been headed shoulders above the other two competitors. they are the best executor out of the three. erik: how does the pricing affect them? is not on microscope them as much as high-profile drug companies. i do not think that the drugstore companies get the same sort of scrutiny or the spotlight on them as much, and in the end, they are able to pass on cost savings to the consumer, especially if they are able to order drugs over a multiple-month time period,

rather than the one-stop shop at the pharmacy counter. vonnie: another name you're --king at is slumber shea why now? june: i can say that since of 2014, i have been underweight on oil stocks. i have owned schlumberger as the only oil stock in my portfolio in the last several years, and this is a company you want to be a net ire of today. they had dropped about 40% along with the whole industry group since the middle of 2014. it is now arguably a better time to be a net buyer rather than a net seller in oil, as long as you're going to be patient. if you look at oil stocks in general on a relative price to book, relative to the overall refrain from and

trying to forecast oil prices, i do not think anybody can forecast oil prices. rather, buy companies on a relative valuation. i think slumber -- i think slumber is the best -- i think slumber -- i think schlumberger is the best. it makes you want to own them, at about $70 a share down from peak from 2014. they are the best in the group. erik: do you see any regulatory risk in schlumberger's acquisition of cameron? david: there is always that risk, absolutely. you probably are being paid for that risk. but with the stock having sold off, in the end, i think they will get it done. they will get the acquisition done, and you are going to see schlumberger being what they have been, the best company that

returns cash flow to investors, unlike many of their peers. company ate supreme cash flow return on investment in a group that often lags in that space and is harder to distance -- is harder to distinguish itself. michael: another stock that you like -- babcock and wilcox. is that a hedge against slumber -- against schlumberger? david: they are. over the years in the small to mid cap area, if you buy spin outs, that has been one of the most important ingredients to success in small and mid-cap stocks. in fact, if you look at the bloomberg spin out, it is lags because of the quality of the spin outs that have taken place in 2015. they have not been this robust

as they have been in the past. wilcox spun out of the parent five months ago. the company just had an investor meeting where they detail their longer-term game plan. margins improving anywhere, 2% points to three percentage , more acquisitions coming with the cash flow they are generating, and price-to-earnings about 15.5 to 16 times next year's earnings. that is a spin out that can work for investors. sowerby, thank you for giving us some ideas for 2016. coming up in the next hour, on bloomberg radio, neil dutta joins us to talk about the fed, the economy, and the outlook ahead. ,:60 a.m., and now -- 960 am

and we are in the nation's capital on 99.1 fm. ♪

erik: good morning, new york city, and around the world. you are watching "bloomberg surveillance." a little more news with the bloomberg business flash. u.s. regular say passenger-side airbag must be subarus, andrb's at least nine deaths are now blamed on explosions called -- caused by those airbag. amex is being -- fedex is being criticized by missing some

deliveries. the late packages will be delivered today for the new star wars movie grosses more than $1 billion in just 12 days, faster than any film ever. "the force awakens" even surprised many disney executives. that is the latest bloomberg business flash. much as i was as expecting a huge turnout for this movie, they must have done a phenomenal marketing job. michael: it has also been 10 years since the last one, and how many times have we watched the first pick in the meantime? had tof what would have happen to disney stock if they had not had -- vonnie: a blowout. michael: it looks like it is going to be a good investment. they have made some excellent acquisitions. think about marvel, for example,

with "the avengers" series. that will probably be surpassed by "star wars." vonnie: and a whole new generation will want to go to the theme parks for the star wars attractions. michael: it is time for our single best chart. it is a demonstration of why janet yellen and the fed think that we are going to see inflation coming back. this is a divergence in health care prices from the cpi and the pce, which is the index that the fed follows. what has happened over the past year or so is that medical expenses have risen because of the way they are weighted in the index, and calculated much more slowly in the pc than in the -- in the pce than in the cpi. there will be lower prices falling out of the index, and just mechanically, that pushes the inflation rate higher.

that is one reason that the fed says we are going to see higher rates. pricesought lower oil would fall out of the index. that does not seem to be happening. we will see higher inflation because we are seeing higher health care costs. erik: which of janet yellen's chosen terms are more important -- "transitory" or "idiosyncratic"? george: we do not know if oil is going to be seeing a rebound. the hope was that they -- that there was going to be some sort of let-up, and it would result in mechanically higher inflation. there is an underlying trend that we will cut some health care and provide some stability, but there really is this kind of anomaly that makes it difficult for the fed to assess where inflation trends are heading. michael: it has not been

difficult for the markets to assess. they do not see inflation out there. george: it is true. of market is skeptical inflation making a quick rebound. vonnie: but by the end of next year, they do converge. george: that is true. with the passage of time and as we get through the fact that it has been sitting there, you should see higher inflation. but that is still a market-implied assumption. vonnie: what will be the second-order effects from the chart that michael just showed? george: i think that is going to contribute to it. we would love to see honest-to-goodness wage inflation feeding back into the other metrics. erik: ignoring health care for a moment and going back to oil, beyond core inflation, has that display she impact of lower oil prices fully trickled through

cpi? george: it is debatable. goods, andknow how cheaper goods and manufacturers, you might be getting lower oil prices feeding through lower inputs and goods produced outside the country. so it usually takes a lag, and the fact that we are seeing another round of lower oil over the last two or three months could mean we could see this feed through with a big lack. -- with a big lag. by may, june, july, all that washes out. it may take until early summer or late spring. michael: how much is this the reason we are seeing a flattening in the curve? the markets do not think the fed can generate inflation with these outside pressures. we are in the camp that , strongn comes through

growth comes through productive means, not just monetary policy. so we need to get our fiscal house in order. period transitory type for the overall administration in washington to see fiscal response create inflation. that will matter more than inflation created by the fed. argued that fed has whatever you think of the inflation outlook, whatever you think about economic growth, zero is not the appropriate interest rate for the growth rate that we have right now. what would you say an appropriate rate is? earlier,s i mentioned making a run toward 1% gives them some wiggle room and allows them to feel that they have accomplished a move away from emergency levels. now it has been put to rest after seven years. would like toy get to 2% or 3%, but this will be a multistage hiking cycle.

50/50unately, there is a draw. every press conference will feel like groundhog day. are they going to do it? are they not going to do it? that is the anxiety that will be with us for the first two or three hikes. michael: it is the federal reserve television full employment act. our guest host for the hour is george goncalves. and komal sri-kumar will join us , talking about his views on 2016. 119.an listen to sirius xm now you can listen in washington, d.c., 99.1 fm. this is "bloomberg surveillance." ♪

michael: time for a look at foreign exchange now. the forex is all about oil today. look at the ruble. it is off its lows for the day, but that is a new low in itself for the year. based on the drop in oil prices. the dollar not moving higher, as

many people thought it would after the fed's lower against the euro and the yen. isk: coming up at 7:00 p.m. -- at 7:00 a.m. eastern time, it ." david westin, what have we got? to take aare going look at retail, see who the winners and losers were at the end of the holiday season. we will also will look -- we will also look at what happened with fedex, not getting packages delivered on time. then with you here with us, we will talk to jpmorgan's megan mcclellan and ask her how she would a la locate her money in 2016 -- how she would a la locate -- how she would allocate her money. george goncalves is still with us. george, the story that looks to

be developing as the story of the year in 2016, the diversions between u.s. rates -- we were talking about the fed pushing u.s. rates higher this year -- and the rest of the world. the bank of england is on hold, and everybody else is still cutting. george: the fed obviously was the first to go into the qe game, was the first to prolong the low rate policy, and was the first to come out of the emergency bubble. so it is understandable to see that kind of thing to a place with the fed taking charge. the question becomes, how fast will this thing go, and ultimately how high will it go. it may constrain them, given the dollar, and the fact that there are still efrin growth -- different growth speeds globally. michael: what is the implication for investors? george: for us, this should

bring in stores that u.s. real rates will continue to be higher the 70 other parts of the world. money will still come to the u.s.. that will be trying to pick it spots on the curve of where to invest the money as the fed starts to raise rates. people are nervous about the fed raising rates on the front end, but they are doing in a methodical, mechanical way, that you can average into as the fed raises rates. in the meantime, the uncertainty what will it is what, happen to long-term rates? make you lose some of those properties that are being well supported. erik: does the bond-bull market continue into 2016? the point where if you were to continue, it would signal something more ominous, like a recession.

i think the bond market probably at best is going to make what is known as carry or yield this year than the actual total return point of view. it is having problems putting up the same type of numbers that it has. erik: 2015 has been a skimpy yield year. trade athat is the hip the moment? george: people are probably still licking their wounds after a tough year. i think people will come back into 2016, and try to figure out where growth is going to be, where inflation will show up there he given how much we have discussed the story all year, inflation products have gotten beat up pretty badly. in bothink the tips asset classes, people will have to reinvest slowly. vonnie: how closely are they watching weaker currencies? i am thinking of the british

pound right now. george: we think that in the currencies story, it is more on how you are funding yourself. as long as the yield pickup is there and you not hedging away currency risk, and people are looking at the higher assets. --hael: we are watching at we are watching the corporate market, and the spreads stabilizedo fed have instead of moving higher. where does corporate go? george: corporate's got hit pretty low. if everything comes back to the oil story, really understanding when does that stabilize, and they get some sort of improvement there and not worry about energy paying back their loans and so on, that is more down the road. i think the core high quality names are still being supported, and anything outside the emp space will be safe. michael: we have been watching

for the saudi arabian budget. details are just starting to come out. saudi officials are saying they 2015.end by 13% in i think we are all going to be going through that exercise as we get our christmas bills in. if i am -- erik: if i am not mistaken, that is what we have been hearing for the last couple of hours. michael: they see spending at 973 million real. where looking to 2016 to see if there are budget cuts. all of that information is on "bloomberg ." "bloomberg surveillance" continues on radio. ♪

david: the grinch who delayed christmas. fedex faces the heat after failing to deliver packages on the holidays. saudi arabia gets squeezed.

plunging oil prices will probably lead to budget cuts. time is running out for puerto rico. will the island miss friday's debt payment deadline? welcome to "bloomberg ." i'm david westin. brendan: and i am brendan greeley. it is a delight to be here. shannon pettypiece is also here. bunch ofalk about a things, among them the light sabers delivered to our house that were used all weekend. it is a lot of hurt but it is amazing. at one point, no light sabers in the kitchen, vonnie quinn. vonnie: i want to know what your kids got. brendan: first word news with vonnie quinn. vonnie: